Supply and demand is the stuff you learn about on the first day of your economics class. When you have too much supply of a product and not enough demand, the price must decline. Conversely, when demand outstrips supply, the price inevitably rises.
With this Econ 101 intro in mind, here is a question for you: What if there was a product that has created constantly rising year-over-year demand for most of the last 15 years, but whose new manufactured supply is cut in half every four years? Any theories on what would happen to its price? Would you be surprised to learn that, on an investment basis, it was the best-performing asset class over the last 15 years?
What is this miracle of finance, you ask? It’s Bitcoin. I know, I know…I can clearly picture the eye-rolls, but hang in with me here for a minute. Yes, Bitcoin’s manufactured supply halves every four years. It has since the cryptocurrency’s inception in 2009, and this will remain the case until 2140. This supply constraint is built in as the foundational level of Bitcoin’s operating algorithm. As it happens, the manufactured supply is slated to halve again in April of 2024. Read on to have your mind blown!
According to Cointelegraph, Bitcoin’s price has risen a staggering 8,990,000% since the launch of this digital currency 15 years ago! No other asset class comes even remotely close.
However, we need to unpack that and understand the risks associated with an asset class like this. Let’s start by checking out the trailing year-over-year returns for the last 15 Years.
I want to direct your attention to 2014, 2018, and 2022, which delivered losses of 61%, 73%, and 66%, respectively. Clearly, this is not an investment for the faint of heart. However, one could also conclude – at least historically – that if you held your investment for a few years after such a precipitous decline, you would have more than made up for the loss. Bitcoin was far from easy to invest in over the last 15 years, but as of January 11, 2024, it is. That’s when the Securities and Exchange Commission (SEC) approved (all on the same day) 11 spot Bitcoin ETFs which you can now hold in your brokerage or retirement plan account. To be crystal clear, the SEC does not endorse Bitcoin as an investment; in fact, the regulator resisted approving it for as long as it could. It has now simply allowed it, with all the associated volatility, whereas before, it prevented the asset from being sold in an ETF wrapper to investors of any Sort.
Still interested in considering Bitcoin for your investment portfolio? If so, what percentage of your portfolio might be appropriate for a rollercoaster investment such as this? Many might rightly conclude 0%, and that’s fine. If you share this view, you can simply stop reading now – this article should in no way be construed as an encouragement to invest in Bitcoin.
However, for those who can stomach some volatility in a portfolio, 1% to 3% might be appropriate. That’s what the CFA Institute recommends to those who invest in the asset class as part of a diversified portfolio. It believes that including a “sliver percentage” (such as 1% to 3%) of Bitcoin will increase the return and decrease the volatility of a portfolio over time as Bitcoin has tended to be uncorrelated to other portfolio asset classes. Some well-known financial advisors have pragmatically pointed out that if 1% of your portfolio blows up, this will probably not change the outcome of your retirement; however, a 1% allocation does have the potential to meaningfully impact your longterm rate of return in a positive manner.
So, is a spot Bitcoin ETF appropriate for you? This is definitely not a question I can answer in a newsletter article. Instead, I would encourage you to discuss the matter with your financial advisor as there are multiple aspects to consider when making this decision. We are here to help you find answers, so don’t hesitate to cal us!
-Jeffrey Janson, AIFA®, CFP®, CBDA
Senior Wealth Advisor
